The High Court has confirmed that pension schemes which have closed to future accrual but have retained a salary linkage for their deferred members are "frozen schemes" within the meaning of the Occupational Pension Schemes (Employer Debt) Regulations 2005 (Employer Debt Regulations). An "employment-cessation event" triggering a section 75 debt will therefore not occur when an employer ceases to employ any such members.
The case related to the G4S Pension Scheme, a multi-employer sectionalised final salary scheme. Two of the sections within the G4S Scheme had been closed to the future accrual of benefits. The active members within those sections who became deferred members at the time of closure had been granted a special status as "Employed Deferred Members" and their pensions were calculated using their final salary on the cessation of their employment rather than on the closure to accrual.
Question for the Court
The Court was asked to determine whether the continuation of the salary linkage in the calculation of the benefits of the Employed Deferred Members meant that those members were "active members" who continued in "pensionable service" for the period while they remained in employment with a scheme employer. If so, then for the purposes of the Employer Debt Regulations the relevant sections had not become frozen at the point of closure to accrual, leaving the participating employers at risk of having to pay a section 75 debt where an employment-cessation event subsequently occurred, such as when they ceased to employ any Employed Deferred Members.
The Court held that it was central to the ordinary understanding of the expression "pensionable service" that it should consist of service which earned the employee pension. As service after closure did not qualify the Employed Deferred Members for additional pension, but simply quantified the pension they had already earned, they could not be said to be in "pensionable service" after the closure date; they had therefore ceased to be active members. As a result, the relevant sections became frozen within the meaning of the Employer Debt Regulations at the date of closure and an employment-cessation event would not occur when a participating employer ceased to employ any Employed Deferred Members.
The judgment will come as a relief to those many scheme sponsors in multi-employer schemes which maintained the salary link when closing their final salary schemes – and probably reflects the understanding of most employers and trustees at the time of closure. The judgment is not relevant to single employer schemes, where ceasing to employ active members is not a trigger for a section 75 debt.
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